How does a pension glidepath work and when do de-risking triggers activate?

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AcadiFi · Accepted Answer

A glidepath is a pre-approved policy that automatically shifts allocation from return-seeking (RS) to liability-driven investing (LDI) as funded status improves, locking in gains and reducing future volatility. It avoids the behavioral trap where sponsors wait for 'just a bit more' and then get whipsawed by a downturn. Operationally: the investment policy specifies funded ratio triggers and target allocations. For Wethergate Corporate Pension starting at 80% funded with 60/40 RS/LDI: when FR hits 85%, allocation moves to 55/45. At 90%, to 45/55. At 95%, to 35/65. At 100%, to 20/80. At 105%, possibly full hedging with pension risk transfer evaluation. Each trigger rebalances within a pre-defined corridor — typically monthly monitoring with rebalancing if triggers are breached by more than 2 percentage points. Why glidepaths work. They institutionalize the 'sell high' discipline. They reduce cognitive load on trustees making real-time decisions in volatile markets. They align with fiduciary duty by reducing sponsor contribution volatility. Common pitfalls. One-way ratchets (only de-risk, never re-risk) can lead to trapped underperformance if FR drops after de-risking. Some plans use symmetric glidepaths that re-risk if FR falls materially. Interest-rate-triggered glidepaths add another dimension — de-risk when rates rise (liabilities cheaper to hedge). Well-designed glidepaths have reduced contribution volatility by 40-60% for disciplined sponsors over the past decade.

How does a pension glidepath work and when do de-risking triggers activate?

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